Life is a comedy to those who think, a tragedy to those who feel, and an open book to those who read. You are welcome to contact China Matters at the address chinamatters --a-- prlee.org or follow me on twitter @chinahand.

The IMF is openly lobbying the Congolese government to renegotiate a $9 billion copper and cobalt deal with China, for the stated reason that the project encumbers the DRC government with sovereign debt (an allegation that the Chinese dispute) at the same time the IMF is mediating with the Paris Club to forgive a chunk of the $10 billion tab run and embezzled in the name of the predecessor state of Zaire by kleptocrat-in-chief Mbuto Sese Seko.

In a classic example of the witless stenography that passes for Western reporting on Asian and African issues, the actual story - IMF threatens to withhold debt relief unless the Chinese deal is renegotiated - got a bit of a twist - as in Voice of America's "Chinese Mineral Deal Blocking Congo's IMF Debt Relief."

To get the real story, one perhaps has to dig even deeper—to the case of the Freeman MacMoRan-operated Tenke Fungurume copper mine.

The website operated by whistleblowing ex-Freeport MacMoRan employees with the buzzkilling name “FCXsucks.com” (“FCX” is Freeport’s NYSE ticker symbol) provides some interesting details and analysis.

The TF project is similar in scale to the Chinese project, and will take somewhere between $2.7 billion to $3 billion in copper out of Congo annually when it gets up to speed.

By a remarkable coincidence, at the same time the IMF is complaining about the Chinese deal, the DRC government is trying to renegotiate the sweetheart deal that the TF project got from the Sese Seko regime—a deal that capped the Congolese share in the project at 17.5%.

To compare and contrast, the DRC share in the Chinese project is already at 32%.

The FCXsucks people think the Chinese deal turns out worse than the TF deal despite the higher percentage because the Congolese partner, Gecamines, walks away with less money per year.

But that’s because the Chinese loan disbursement is bigger than the Freeport investment and covers a range of do-gooder infrastructure items not directly related to the deal. From the overall perspective of the DRC, adding the infrastructure improvements to Gecamine’s own ROI, the Chinese deal doesn’t look too bad.

President Kabila reportedly wants to see the DRC’s share in the TF project boosted to 45%, over the vigorous opposition of the project’s investors in the United States and Canada, and the U.S. government.

At the same time, the President is no doubt all ears to the IMF’s insistence that the interest rate on the Chinese project be dialed back from more expensive commercial terms to government-to-government concessional rates, like those China gave Angola.

Perhaps the DRC is less interested in the IMF’s proposal that the Chinese project get scaled back to $6 billion, as that would decrease the quantity of nice things the Chinese would build there in the next few years.

The Democratic Republic of Congo is flat on its back in terms of economic and social infrastructure. China coming in with a fast-track project to help rebuild the country (as the PRC did for Angola, in return for crude oil) is probably more welcome than a lecture from the IMF on Mbuto Sese Seko’s debt.

However, it will not be surprising if President Kabila—eager not to alienate either China or the West—finds a way for both deals—and debt relief--to go ahead.

The war in the Democratic Republic of Congo (previously Zaire) since 1998 has killed an estimated 5.4 million people, making it the bloodiest conflict since World War II.

Although the conflict has attracted intensive meddling from outsiders fixated on the country’s vast mineral reserves, the immense human suffering has inspired little in the way of the high profile attention and assistance.

The website Friends of the Congo provided this chilling perspective on how things are in the eastern end of the republic (the main copper deposits are in the south, in Katanga, which also saw fighting during the wars):

The International Center for Transitional Justice, the Human Rights Center at the University of California, Berkeley and the Payson Center for International Development at Tulane University conducted a survey of 2,620 Congolese between September and December 2007. The study focused North and South Kivu, Ituri, Kinshasa, and Kisangani. The results of the survey were predictable but shocking nonetheless. A summary of the survey revealed:

• 80 percent of respondents said they had been displaced at least three times in the last 15 years• 75 percent said their cattle or livestock had been stolen• 66 percent said their home had been destroyed or confiscated• 61 percent of those polled in the east said they witnessed the violent death of a family member or friend• 60 percent said one more of their household members had disappeared• 34 percent said they themselves had been abducted for more than a week• 53 percent reported being forced to work or being enslaved by armed groups• 31 percent said they had been wounded in fighting• 35 percent said they had been tortured• 46 percent had been threatened with death• 23 percent had witnessed sexual violence• 16 percent had been sexually violated and 12 percent multiple times• 85 percent of people polled believe "those responsible for the violence should be held accountable"

In North Kivu, at the epicenter of the violence, responses to the question "who protects you" were quite revealing. Respondents answered God (44 percent), the army (25 percent), the police (8 percent), nobody (7 percent), U.N. peacekeepers (6 percent).

Tuesday, June 09, 2009

I have an article up at Asia Times Online about China’s interest in IMF Special Drawing Rights (SDRs) as an alternative to the U.S. dollar as an international reserve currency: China Discovers Value in the IMF.

The Obama administration’s effort to expand the lending capacity of the IMF by US$100 billion—an important precondition for increased issuance of SDRs—is facing united Republican opposition and skepticism from a swath of liberal Democrats in the House of Representatives. The fact that the IMF credit is tacked onto the supplemental appropriation bill for the Iraq and Afghan wars isn’t helping.

The spectacle of liberals teaming up with anti-Obama conservatives in an attempt to hand the White House a humiliating defeat is an interesting one and, to President Obama’s advisors, no doubt unwelcome.

In contrast to its lacksadaisical approach to the release of the hapless Uighur detainees at Guantanamo, the White House is apparently vigorously “whipping” this issue, and one imagines that Rahm Emanuel will be able to prevent 40 Democratic votes from sliding into the “No” camp and dooming the bill.

In any case, the idea that China might be able to diversify away from the dollar without adjusting its artificially low RMB:US$ exchange rate apparently gives some economists, like the Council on Foreign Relations’ Sebastian Mallaby, some heartburn.

So neither the IMF idea nor the scattershot attempts to internationalize the yuan will rescue the Chinese from their dilemma. China has accumulated at least $1.5 trillion in dollar assets, according to my Council on Foreign Relations colleague Brad Setser, so a (highly plausible) 30 percent move in the yuan-dollar rate would cost the country about $450 billion — about a tenth of its economy. And, to make the dilemma even more painful, China’s determination to control the appreciation of its currency forces it to buy billions more in dollar assets every month. Like an addict at a slot machine, China is adding to its hopeless bet, ensuring that its eventual losses will be even heavier.

I would suspect that the window of opportunity for condescending sarcasm by arrogant Western economists is closing fast.

Despite half-hearted attempts to blame Chinese T-bill purchases for fueling the West’s propensity toward criminally reckless lending, the signature financial collapse of the last 80 years was engineered by the genius economists of America and Europe, not the dumbass mercantilist Commie bureaucrats of Beijing.

And, in a couple years, it may seem better to have a trillion or two in the bank—as China does—instead of piling up a trillion or two in deficits—as the U.S. is doing.

We’ll see.

Meanwhile, China is also taking concrete steps to use the yuan for international settlements in transactions with Asian countries, promoting yuan transactions by Hong Kong banks, and preparing to sell some yuan denominated bonds.

The settlement efforts are actually modeled on old business arrangements between China, Vietnam, and other ostracized Communist countries back in the day when nobody had dollars and the RMB had to be used to keep score.

In other words, a logical, pragmatic regional approach to the nagging dollar problem, and not piece of foolhardy, grandiose global legerdemain.

Behind Mr. Mallaby’s sneering I detect, perhaps wrongly, the frustration of an economist who sees China dodging the bullet once more.

If China comes out of the current global recession looking pretty good, this will be the second time in the last twenty years that its monetary and forex policy confounded the naysayers, first time being the 1997 financial crisis brought to Asia courtesy of deregulation, George Soros, and the IMF…

…and the RMB exchange rate hawks centered around ex-IMF research department director and determined panda kicker Michael Mussa, Nicholas Lardy, and Morris Goldstein at the Peterson Institute may be forced to examine the assumptions that underlie the view that China’s refusal to float the RMB is counterproductive and futile.

Monday, June 08, 2009

I have a feeling that Pyongyang, taking a leaf from Iran’s book (and its detention and subsequent release of American journalist Roxana Siberi) has the idea of releasing the two hapless American journalists Laura Ling and Euna Lee--who were just sentenced to twelve years of hard labor for illegally entering North Korea from China and alleged “hostile acts”—as a goodwill gesture to the United States.

It will be interesting to see if the Obama administration will consider the journalists’ release as an adequate olive branch for resumption of talks.

In a sense of where the goalposts are set for hostage-journalists, Bill Richardson, go-to guy for North Korean jawboning (unless Al Gore gets into the act) said:

“Talk of an envoy is premature because what first has to happen is a framework for negotiations on a potential humanitarian release. What we would try to seek would be some kind of a political pardon.”

Hopefully for Ms. Ling and Ms. Lee, the Obama approach to North Korea will gain some traction.

When the old arguments about North Korea resurfaced, I wondered if I could recycle my Korea posts from the Bush administration under the heading SSDD: Same [Stuff] Different Day.

All the familiar soft-power tropes of the confront-Pyongyang years were there: Security Council resolutions, the Proliferation Security Initiative, financial sanctions against North Korean banks, heck even runaway Patriot Act 301 Banco Delta Asia investigation ubermeister Stuart Levey was still there (though the State Department briefing transcripts can’t seem to spell his name properly. Stuart Levy? Hey Stu, don’t stand for that! Freeze their bank accounts til they get it right!).

I wondered if the Obama administration was genuinely or willfully clueless about Kim Jung-Il’s desire for a special relationship with the United States.

The good news, I think, is that the Obama administration has a plan. Not exactly eager engagement, but not just overt hostility or malign neglect, either.

In other words, Different Administration Different Day

The New York Times had a useful North Korea backgrounder a.k.a. supervised spin in the anonymous sourcemobile for longtime passenger David Sanger with Obama administration insiders at the wheel.

The White House essentially put North Korea on notice that the previous exercises in negotiation centered on Pyongyang’s nuclear program won’t be repeated, no matter how many devices Kim Jung-Il sets off.

Because the current foreign policy team has decided that the current regime will never surrender its nukes:

While Mr. Obama was in the Middle East and Europe last week, several senior officials said the president’s national security team had all but set aside the central assumption that guided American policy toward North Korea over the past 16 years and two presidencies: that the North would be willing to ultimately abandon its small arsenal of nuclear weapons in return for some combination of oil, nuclear power plants, money, food and guarantees that the United States would not topple its government, the world’s last Stalinesque regime.

Now, after examining the still-inconclusive evidence about the results of North Korea’s second nuclear test, the administration has come to different conclusions: that Pyonyang’s top priority is to be recognized as a nuclear state, that it is unwilling to bargain away its weapons and that it sees tests as a way to help sell its nuclear technology.

“This entirely changes the dynamic of how you deal with them,” a senior national security aide said.

The unspoken corollary appears to be that, since regime change is also off the table, the United States has decided it can live with a nuclear North Korea—as long as it doesn’t proliferate.

The State Department press briefing on Friday displayed, to my mind, sweet reasonableness and a marked shift from security to economic terms of debate.

Assistant Secretary Philip Crowley resisted the urge to hype the red-meat issue of the trial of Lee and Ling.

He did state the official “ultimate” policy to denuclearize North Korea, but also made the case for engagement by touching on the point frequently harped on by China Matters as the proper point of departure for U.S. policy: that North Korea is an Asian economic dragon en ovo:

We want to get North Korea back into a negotiating process. We want to get them to stop doing things that are destabilizing in the region and start to focus on what it has to do in the future. I mean, if you look at South – at North Korea’s economy, I mean, 30 years ago, it was one of the wealthier countries in the region, and today it is one of the poorest countries on Earth. So I think – and certainly, its neighbors have advanced significantly from an economic standpoint – these facts are known in North Korea. So to the extent that we can find financial levers to put appropriate pressure on North Korea, it’s not – that’s not an end in itself; it is a means to an end.

What we ultimately want is a denuclearized North Korea. We want a country that is acting constructively, beginning to integrate itself into the larger community, act responsibly with respect to its neighbors. That’s our ultimate objective, and we will continue to use whatever levers that we see available and we think will be effective. But our ultimate objective is to get back to negotiations and to get – and to start to once again make progress on the commitments that North Korea has made previously.

…

I would think that over time, the increase in – the gap between North Korea and the rest of the region is growing larger. Those facts have to be known to the people of North Korea. And they eventually – I mean, this is what’s tragic about this whole situation. North Korea is spending billions of dollars to fire off missiles, conduct nuclear tests, and yet they’re not able to feed their people.[emph. added]

But even if talks do resume, North Korea will have to deal with the Obama administration’s stated intention not to enable another expensive and unproductive nuclear boondoggle as a precondition for detailed negotiations.

As Defense Secretary Gates said, “I’m tired of buying the same horse twice.”

In other words, I see the prospect for some systematic “Nixon Goes to China” diplomatic engagement, rather than another session of ritualized extortion centered on Kim Jung Il’s nuclear program.

We’ll see if the Obama administration can display the requisite ritualized aggression at the UN Security Council needed to deflect Republican charges of capitulation and appeasement.

To set the anchor for negotiation, I think the Obama administration is drawing a PSI red line for North Korea that even China may be able live with—and, more importantly, affirm in a UN Security Council resolution: no exports of missiles or missile technology, let alone nuclear technology or devices

Distinct and reasonable Proliferation Security Initiative guidelines—ones that involve inspections only by host navies in their own territorial waters—will, I believe, be important to China.

Little known fact: China was a conspicuous and helpless victim of a-U.S. directed diversion and inspection in the pre-PSI days:

In the Yin He incident of 1993, the Clinton administration alleged that a Chinese container ship was carrying chemical weapons precursors destined for Iran. Diplomatic pressure by the United States prevented the Yin He from docking at any of its planned ports of call. After futile representations and impotent protests by the Chinese government and 20 days in nautical and diplomatic limbo the unlucky vessel finally proceeded to Saudi Arabia’s Dammam Port for a joint inspection of its 728 containers by the United States, China, and the Saudis—which found nothing.

John Bolton’s subsequent effort to purpose the PSI as the tool for an indiscriminate and destabilizing economic blockade of North Korea for the purpose of regime change did nothing to endear the initiative to China.

With only a minor global naval presence, the Chinese are extremely leery of establishing a precedent for the U.S. and/or its allies to barge aboard other countries’ ships in pursuit of whatever.

China will endorse the exercise of a PSI initiative against North Korea gingerly, if at all.

But if the Obama administration can come up with a sanction that China sincerely supports (as opposed to the sanctions of the Bush administration, which targeted China almost as much as North Korea and were openly opposed by the PRC) while holding out the possibility of diplomatic and economic engagement, we might actually see some movement on North Korea.

And Kim Jong Il, eager to secure his son’s succession and a controlled opening to the global economy, might decide that the Obama administration is offering him the best opportunity he can expect from the United States in his dwindling lifetime.